Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Saturday, October 27, 2012

Tax Notes Today has an article summarizing comments made by a government attorney and by practitioners at a recent annual conference sponsored by University of San Diego School of Law and the Procopio International Tax Institute. See Stephanie Soong Johnston, IRS Advancing in Battle Against Offshore Tax Noncompliance, McDougal Says, 2012 TNT 209-8 (10/29/12) Readers of this blog will already know the substantive content of the article, but I write just to note the concluding paragraph:

Overall, McDougal [an IRS attorney prominently involved in the offshore initiatives] was confident that good progress has been made in battling offshore tax compliance issues, both in the United States and abroad. "Consciousness is being raised about this problem," he said. "And let's face it, when you've got the Pope coming out and writing a letter talking about how harmful it is for wealthy people to be evading their taxes when the needs of the poor are going unmet, that really adds fuel to the fire. So there is a change in consciousness and the situation is gradually improving."

This, of course, is a variation in this context of Jesus' famous "Render Into Caesar" comment. See Wikipedia entry here. The full quote is: "Render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's." Matthew 22:21 (the King James Version of the quote is here; please note on the link that you can use the features on the page to see the entire context of the quote).)

In a new study, the authors take a close, empirical look at the use of shell corporations to skirt the law. Michael Findley, Daniel, and Jason Sharman, Global Shell Games: Testing Money Launderers' and Terrorist Financiers' Access to Shell Companies, (9/22/12), here. Some of the findings of the study have been the subject of speculation. The study confirms some of the speculation. One interesting finding is that the countries complaining the loudest about tax haven use of shell companies are some of the biggest abusers.

Of course, we have seen shell corporations and other types of shell entities used with the offshore accounts to give added levels of identity protection. Use of such entities are deemed particularly egregious by DOJ Tax and the IRS. Indeed, virtually all of the prosecuted cases involving offshore accounts have involved such shell entities.

So, here are some selected excerpts:

Summary

For criminals moving large sums of dirty money internationally, there is no better device than an untraceable shell company. This paper reports the results of an experiment soliciting offers for these prohibited anonymous shell corporations. Our research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. Evidence is drawn from more than 7,400 email solicitations to more than 3,700 Corporate Service Providers that make and sell shell companies in 182 countries. The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers. Shell companies that cannot be traced back to their real owners are one of the most common means for laundering money, giving and receiving bribes, busting sanctions, evading taxes, and financing terrorism.

Friday, October 26, 2012

I have just recently come across the plea agreement in United States v. Robert Edward Cone (SD TX Crim. No. H-11-617), here. The plea was entered in February; sentencing is set for early next year. The plea and my personal knowledge of the case (I represented a witness) indicate that, although a foreign account and the Schedule B foreign account question were involved, the case was an outlier to the Government's foreign account initiative. Hence, I have put the case in spreadsheet with an indication that it is an atypical case. First the key data and then I provide a narrative explanation.

Saturday, October 20, 2012

In United States v. Hines, 2012 U.S. Dist. LEXIS 149713 (ED NY 10/17/12), [will provide a link when I can], the Government sought an injunction against the defendants who it alleged was promoting a fraudulent tax shelter. An injunction action is a civil suit in which discovery is permitted. So far, just routine. But, before discovery was implemented, the Government "advised the court that there is an open criminal investigation of both defendants that is related to the allegations at issue in this action." The Government nevertheless wanted to take civil discovery. Consistent with the procedures then applicable in the case, the Government moved to take the discovery it wanted. The Magistrate Judge granted the motion, contemporaneously denying a stay of the proceeding while the criminal investigation proceeded, but entered the following FRCP Rule 26(c) protective order:

[T]he discovery obtained in this action may be used solely for purposes of this litigation and may not be shown, distributed or disseminated to any other person or otherwise used for any purpose other than for impeachment purposes in another proceeding or in connection with a perjury prosecution arising out of the defendants' deposition testimony. However, the government may use information derived from this action against other individuals or entities in any other proceeding.

The Magistrate Judge thought this was the appropriate balancing of the competing needs for the civil litigation and the defendants' potential Fifth Amendment privilege.

The Government appealed the Protective Order to the district judge.

The district judge started the analysis as follows:

This discovery appeal presents an interesting issue at the intersection of a court's power to issue a protective order prohibiting the use of discovery obtained in a civil litigation in other proceedings, and a party's constitutional right to assert the Fifth Amendment privilege against self-incrimination in a civil enforcement action brought by the government. First, under Federal Rule of Civil Procedure 26(c)(1)(B), a court "may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense" that "specif[ies] terms . . . for the disclosure or discovery." Second, "there is no question that an individual is entitled to invoke the privilege against self-incrimination during a civil proceeding . . . [a]nd this means that a civil litigant may legitimately use the Fifth Amendment to avoid having to answer inquiries during any phase of the discovery process." 4003-4005 5th Ave., 55 F.3d at 82 (citations omitted). If a defendant in a civil proceeding chooses to invoke the Fifth Amendment as a result of an overlapping criminal investigation, such defendant risks an adverse inference from his assertion of the privilege. Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 97-98 (2d Cir. 2012).

As explained in the press release, Mr. Duban apparently got too close to his client, so the conspiracy charge related to that. In addition, he had has own offshore accounts that he failed to properly report. I quote the foreign activity portions of the press release below.

Defendant: Dennis DubanPlea: Conspiracy to defraud IRS (1 count) and aiding and assisting (1 count)Banks: Wegelin (for his client) and "New Zealand accounts" for DubanEntities: Yes (both for Duban and his client)Tax Loss: at least $1 million (apparently for the client and Duban)FBAR Penalty: 50% of high balance in his personal accounts

Thursday, October 11, 2012

I don't have all the information from the sentencing, but I cut and paste the core information from the blog on the plea and add information from the reports on the sentencing that I have. I will try to clean up all this tomorrow and update the spreadsheet.

“Mr. Roessel does not claim to be an innocent victim,” his attorney, Lee Stapleton, wrote in an Oct. 9 court filing urging leniency. “While he relied on the advice of Swiss professional bankers, he chose to keep the accounts secret and for many years did not advise his accountant that he had a foreign bank account.”

The second issue raise in both the Walton and the Brooks petitions for certiorari in United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here and here, is whether the trial court properly instructed the jury on deliberate ignorance as a substitute for specific intent (knowledge) in a crime where the text requires specific intent (knowledge). The deliberate ignorance concept is also called conscious avoidance, willful ignorance and the ostrich concept (mostly mentioned as the ostrich instruction).

The Walton petition alleges that the instructions given were not consistent with the Supreme Court's approval of the deliberate ignorance concept in Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. ___, 131 S. Ct. 2060 (2011), here. I previously blogged on Global-Tech in Supreme Court Speaks on Willful Blindness (Federal Tax Crimes Blog 6/2/11), here. Suffice it to say now that, in that civil patent case, the Supreme Court discussed the concept of deliberate ignorance in criminal cases and appeared to bless the application of the doctrine. Assuming that announcing its blessing in that context (which might make it dicta, albeit influential dicta), the question is what does this concept mean? (I argue in my text Federal Tax Crimes book (copied at the end of this blog) that ignorance is not specific intent (knowledge), hardly a novel argument since Justice Kennedy in dissent in Global-Tech as well as many others have asserted the same argument.)

Accepting the lay of the land as the Supreme Court has served it up in Global-Tech, the petitions in Brooks ask whether the instructions in Brooks were consistent with what the Supreme Court said about deliberate ignorance and whether the varying court's application of the doctrine should be reconciled so that the standards of criminality are consistent among the Circuits. I should say in this regard that no court has rejected the concept of deliberate ignorance -- the conflict is over how it is conceptualized and the elements required that the jury must be instructed in some meaningful manner.

Wednesday, October 10, 2012

It is commonplace that the prosecutors will give immunity to a prosecution witness to overcome the witness's Fifth Amendment privilege and forcing the witness to testify for the Government which, in a criminal case, means against the defendant. But, the defense has no such tool in order to prevent a defense witness from claiming the Fifth Amendment. Is this fair? If not, what can be done about it.

The historical rule has been that the defense has no way to force the granting of immunity in order for the witness to have the incentive or the compulsion to testify over Fifth Amendment claims. But there are exceptions.

In United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here, the defendants' requested immunity for a defense witness who refused to testify for the defense. The prosecutors refused to request immunity under the statute, and the trial court refused to grant immunity. The Fifth Circuit affirmed the trial court's refusal to grant immunity. One of the defendants, Walton, seeks certiorari on the issue. See petition here.

I introduced other issues in the Brooks case in an earlier blog, A White Collar Crime Case with Issues Relevant to Tax Crimes (Federal Tax Crimes Blog 10/10/12), here. In this blog, I focus on the defense witness immunity issue.

First, I offer the key excerpts from the Fifth Circuit decision. Second I offer excerpts from the reasons argued for granting the petition for certiorari in Brooks. Third, for what it is worth, I offer my discussion from my Federal Tax Crimes book.

In Brooks, allegedly in order to manipulate commodity prices, Defendants, commodity traders with an energy company, provided false information on commodity trades to an trade publication widely used to indicate prices and price movements, thus potentially having a disruptive effect on the markets in those commodities. They were prosecuted and convicted for false reporting in violation of the Commodities Exchange Act and the federal wire fraud statute.

The Fifth Circuit addressed many issues in affirming their convictions. I will discuss in separate blogs later the two issues being presented on petition for writ of certiorari. Those issues are (i) the holding that the Government did not have to grant immunity to witnesses who might be exculpatory to defendant and (ii) the blessing of the deliberate ignorance instruction given to the jury.

I will summarize here the remaining issues in the Fifth Circuit opinion that I think of particular relevance to tax crimes. Keep in mind that tax crimes are just a subset of white collar crime, so many of the skirmishes in white collar crime cases generally will often appear in tax crimes cases.

1. Government Interference with Payment of Legal Fees.
The defendants alleged that the Government's actions, direct and indirect, caused their employer to withhold attorneys fees for their defense and thereby violated their Fifth and Sixth Amendment privileges. Defendants relied upon the landmark decision in United States v. Stein, 541 F.3d 130 (2d Cir. 2008), a criminal tax prosecution of tax shelter promoters, where the Second Circuit affirmed dismissal of most of the defendants because the Government had put undue pressure on KPMG to withhold attorneys fees for those defendants. The Court noted in this regard that the case was distinguishable from Stein because: "The district court's factual findings bound the Second Circuit, and on such findings, the Second Circuit held KPMG's actions were state actions that violated the defendants' right to counsel of their choice." No such findings were made in Brooks.

Tuesday, October 9, 2012

In Hovind v. Commissioner, T.C. Memo. 2012-281, here, the Tax Court decided decided that (i) the taxpayer had "had unreported Schedule C income and expenses (collectively, net profit) attributable to Creation Science Evangelism (CSE) and Dinosaur Adventure Land (DAL) for each of the years at issue; " (ii) that the taxpayer was liable for additions to tax under section 6651(a)(1) for failing to timely file her income tax return for each of the years at issue; and (iii) and that the taxpayer is liable for the fraud penalty under section 6663(a) for each of the years at issue.

The following is from the opinion and gives a good introduction (footnotes omitted):\

Mr. Hovind established CSE in 1989. CSE purported to be a nondenominational religious organization that advocated the message of creation science and opposed the theory of evolution. CSE promoted its message through live lectures by Mr. Hovind and Eric Hovind. Mr. Hovind frequently traveled, domestically and internationally, for speaking engagements, and petitioner occasionally accompanied Mr. Hovind on these trips.

The Ministry then somehow developed, with various revenue generating projects. The Court then continued (some footnotes omitted):

Wednesday, October 3, 2012

TIGTA has issued the following report: TIGTA, The Process for Individuals to Report Suspected Tax Law Violations Is not Efficient of Effective (TIGTA Ref No 2012-40-106 9/10/120), here. Taxpayers should remember that the Form 3949 A, Information Referral, here, is the form generally used for this purpose. Persons interested in providing tips involving large taxpayers might want to consider invoking the whistleblower regime in Section 7623(b), by using the Form 211, Application for Award for Original Information, here. The key excerpts from the TIGTA report are:

IMPACT ON TAXPAYERS

The IRS website for reporting fraud was visited 501,218 times in Fiscal Year 2011, and during that year 116,307 individuals submitted a Form 3949 A, Information Referral, to the IRS. The IRS is not efficiently or effectively processing these referrals. Reporting guidelines provided to taxpayers and employees are confusing and inconsistent and cause individuals to use Forms 3949 A for other than its intended purpose. This creates a burden on both the individuals and tax administration. Additionally, a lack of oversight and effective procedures has resulted in workable Forms 3949 A, including identity theft claims, being destroyed without any acknowledgement of receipt to the taxpayer.

WHY TIGTA DID THE AUDIT

This audit was initiated based on a TIGTA Office of Investigations referral which reported that thousands of identity theft cases reported on Forms 3949 A were not being processed.

WHAT TIGTA FOUND

Reporting guidelines provided to taxpayers and employees are confusing and inconsistent. Instructions on Form 3949 A do not explain what types of fraud and tax law violations to report using this form. As a result, individuals often use Form 3949 A for purposes other than reporting suspected tax fraud or tax law violations. Additionally, because Form 3949 A lacks specificity, taxpayers do not always provide the IRS with sufficient information for the IRS to take action. Finally, the IRS routes identity theft referrals received on a Form 3949 A as regular correspondence, which delays actions from being taken on identity theft cases.
As a result, many referrals do not meet any criteria under which the IRS could or would be able to take action(s). A lack of quality review resulted in referrals being destroyed. Additionally, the forms are often used for other purposes (e.g., claims by victims of identity theft). About 3,000 Forms 3949 A used to report identity theft were destroyed due to a lack of procedures on how to process these claims. Victims were not notified.

Ineffective routing procedures and oversight have allowed Forms 3949-A to be misrouted to the wrong functions. Others are mistakenly considered unworkable and retained for 90 days and then destroyed.

In performing the IRS’s law enforcement mission, Criminal Investigation (CI) special agents may be called upon to execute search warrants and arrest those suspected of violating the U.S. tax laws and other Federal statutes over which the IRS has jurisdiction. When performing their duties, special agents carry firearms and are authorized to use deadly force to protect themselves and the public. Suspected criminals, who face the prospect of incarceration, may violently resist arrest regardless of how minor the crime may seem. CI special agents must be fully prepared to respond with force when necessary. Special agents not properly trained in the use of firearms could endanger the public, as well as their fellow special agents, and expose the IRS to possible litigation over injuries or damages.

WHY TIGTA DID THE AUDIT

This audit is part of TIGTA’s Fiscal Year 2012 Annual Audit Plan and addresses the major management challenges of Tax Compliance Initiatives and Achieving Program Efficiencies and Cost Savings. The overall objective was to determine whether CI has effective internal controls to ensure special agents are adhering to procedures regarding the required training and qualifications in the use of firearms. This included evaluating the potential impact on CI’s program if special agents failed to qualify.

WHAT TIGTA FOUND

CI’s firearms training and qualification requirements generally met or exceeded those of other Federal law enforcement agencies. However, TIGTA found that some CI special agents did not meet all firearms training and qualification requirements. Field office management did not always take consistent and appropriate actions when a special agent failed to meet the requirements because the guidance is vague. In addition, there is no national-level review of firearms training records to ensure that all special agents meet the qualification requirements. TIGTA also found that firearm discharge incidents were not always properly reported and that remedial training was not always required after accidental discharges due to special agent negligence. Lastly, procedures for securing a firearm after a discharge are not adequate.

Francis further admitted that in July of 2007 and January of 2008, currency deposits totaling $50,000 and $99,600, respectively were structured into his domestic bank accounts. Structured deposits involve amounts of less than $10,000 that are designed to avoid laws requiring that all cash transactions of $10,000 or more be reported to federal authorities.

IRS Notice 97-24, here, issued in April 1997, expressed the opinion of the IRS that trusts akin to the Aegis trusts were an unlawful means of tax avoidance. The evidence established that the defendants were aware of the notice and continued their behavior anyway. "The defendants proposed an instruction that would have advised the jury on the relative legal weight of IRS regulations, revenue rulings, letter rulings, and public notices, the last of which "have no force of law.'" The question is what exactly was the role of the Notice that the defendant's ignored. Was it like a regulation which usually does have the force of law or just an IRS opinion? What was the jury to make of the defendants not taking heed of the Notice?

We study the various forms of IRS pronouncements in the UH Tax Procedure Class. Here is the portions of the Federal Tax Procedure text (as revised for the next edition) discussing Notices ( most footnotes omitted):

The IRS issues “Notices” that are less formal than Regulations. These notices are used to provide quicker notice to the public than allowed by the other forms of pronouncement.

A notice, which is published in the Internal Revenue Bulletin and compiled annually in the Cumulative Bulletin, contains guidance that involves substantive interpretations of the Code or other provisions of law. Topics can include changes to forms or to other previously published materials, solicitation of public comments on issues under consideration, and advance notice of rules to be provided in regulations when the regulations may not be published in the immediate future. Increasingly, notices have served as a critical component of the Service's efforts to combat abusive tax avoidance transactions, as they have been used to identify transactions about which the Service has concerns. Given the rapid pace of developments in this area, notices have proven particularly useful for quickly disseminating information that allows taxpayers to understand exactly which transactions will be of interest to the Service, including so-called “listed transactions” and “transactions of interest,” both of which are "reportable transactions" under section 6011. fn

The Aegis defendants were convicted of conspiracy which, as Judge Easterbrook has lamented, are “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.” United States v. Reynolds, 919 F.2d 435, 439 (7th Cir. 1990). At the end of this blog, I address the role of the conspiracy charge in white collar crime, of which tax crimes are a subset. First, I want to deal with the Seventh Circuit's affirmance of conspiracy in the Aegis case, Vallone.

(a) defraud the United States by impeding, impairing, obstructing and defeating the lawful government functions of the IRS of the Department of the Treasury, an agency of the United States, in the ascertainment, [*94] computation, assessment, and collection of revenues, namely income taxes; and (b) commit offenses against the United States, namely: to willfully aid and assist in, and procure, counsel, and advise the preparation and presentation, to the IRS, of returns and claims on behalf of others which were fraudulent and false as to various matters, in violation of Title 26, United States Code, Section 7206(2).

Tax and white collar crimes afficionados will recognize that, as framed, there is a single conspiracy with two objects. The first object is what is called an offense conspiracy. The second object is a defraud conspiracy, in a tax setting commonly referred to as a Klein conspiracy to impair or impeded the lawful functioning of the IRS. (Note, the word defraud in the conspiracy statute is broader than the normal definition of defraud and reaches mere attempts to impair or impeded.) A conspiracy can have a single object to violate one or more specific statutes (that is more technically an offense conspiracy) or to defraud (that is more technically a defraud conspiracy). But the conspiracy can be to do both -- both to violate one or more statutes and to defraud. The latter is the type involved in Vallone.

I normally did not stoop to politics (at least overtly) in this blog. (Outside this blog, I do have opinions and sometimes express them.) However, where politics intersects the criminal tax law, well, I feel it appropriate to post something on this blog.

The political backdrop is that presidential candidate Mitt Romney apparently did not claim all of his tax deductions for charitable contributions. For most of us, that would seem odd. At the most basic level, many taxpayers cannot afford to forego deductions -- they need the tax savings. But money is one thing Mr. Romney has in abundance, so he does not have the same level of need and, to put it another way, he can easily afford to pay more tax than the law says he owes. Besides, he had the goal of claiming to the American public that he has paid tax at something like 14% (rather than something less) and thereby can empathize with the taxpaying public.

But that does raise an issue as to how he presents the forebearance on his returns. By reporting his taxable income and tax liability without claiming the deductions, has Mr. Romney done something immoral or even illegal?

A noted tax commentator, Charles I. Kingson, published a letter to the editor of Tax Notes noting that the Form 1040 Mr. Romney signed contains the standard jurat declaring under penalty of perjury that "to the best of my knowledge it is true, correct, and complete." See Charles I. Kingson, Did Romney Violate the Jurat?, 137 Tax Notes 107 (Oct. 1, 2012)

In the UH Tax Procedure class, we studied the gradations in confidence in tax reporting positions. I cut and paste this from the Tax Procedure book:

The tax law has developed the following jargon in quantifying levels of confidence in reporting return positions, with the percentage being the projected chances for success if litigated:nonfrivolous = 10 percent or better chance of winningreasonable basis = 20 to 25 % or better chance of winningrealistic possibility of success = 33 1/3 % or better chance of winningsubstantial authority = perhaps 35 to 40 % chance of winningmore likely than not = more than 50 % chance of winningprobable = 70 to 80 % chance of winning

These standards can be stated in the inverse:nonfrivolous = 90% chance of losingreasonable basis = 75-80% chance of losingrealistic possibility of success = 66 2/3 % chance of losingsubstantial authority = perhaps 60 to 65% chance of losingmore likely than not = less than 50 % chance of losingprobable = 20-30 % chance of losing